Cisco's profit jumps 34% on sales increase

Demand driven by video, broadband content; shares dip in after-hours

WASHINGTON (MarketWatch) -- Cisco Systems Inc. on Tuesday said third-quarter profit leaped 34%, as the company whetted a growing appetite by corporate customers and big phone and cable companies for its networking gear.

The San Jose, Calif.-based equipment maker
CSCO, -0.03%
reported net income of $1.9 billion, or 30 cents a share, in the quarter ended April 28 compared with $1.4 billion, or 22 cents a share, in the year-earlier period.

Revenue climbed 21% to $8.87 billion from $7.32 billion. Sales grew 17% -- at the upper end of Cisco's prior forecast -- omitting revenue from the Scientific-Atlanta business acquired last year.

Excluding onetime items and the cost of stock options, Cisco would have earned $2.1 billion, or 34 cents a share, on a non-GAAP basis, meaning results do not conform to generally accepted accounting principles. Cisco earned $1.8 billion, or 29 cents a share, on that basis in the corresponding 2006 quarter.

Chief Executive John Chambers said rising demand for equipment that allows companies and network operators to deliver video shows no signs of slowing. Cable and phone providers in particular are eager to sell a combined package of voice, Internet and TV services as they battle for control of the consumer market.

"Video continues to drive network demand," Chambers said in a conference call with analysts. "Momentum remains very strong."

On Tuesday, Cisco stock rose 55 cents to close at $28.36 in regular trading on the Nasdaq Stock Market, near a multi-year high of $28.99 set on Jan. 11.

Yet shares of Cisco fell more than 5% in after-hours action to $26.88.

Some investors say the stock's valuation is expensive after a 30%-plus gain over the past 12 months, compared with a 10% rise in the Nasdaq Composite Index.

The bulk of that gain in Cisco's stock occurred in the second half of 2006 after Chambers raised the vendor's full-year sales forecast due in part to robust demand for Scientific-Atlanta equipment. The increase has added more than $80 billion to Cisco's market value.

Scientific-Atlanta helps results

The just-ended quarter is the last period in which Cisco's year-over-year comparisons were helped by its $6.9 billion acquisition of Scientific-Atlanta, whose equipment allows cable operators to offer high-speed Internet service.

Sales in Scientific-Atlanta jumped 85% to $752 million from $407 million a year earlier. The increase was closer to 30% adjusted to conform with the non-calendar basis on which Cisco reports quarterly results, Chambers said. About 10% of Cisco's sales now derive from Scientific-Atlanta.

In the third quarter, switching sales increased 15% to $3.1 billion. Router revenue climbed 16% to $1.8 billion from a year earlier.

Cisco said sales of its high-end CRS-1 router, which allows large network operators such as Sprint Nextel Corp. or Deutsche Telekom to handle huge volumes of Internet traffic, are sizzling.

Cisco, for instance, received $250 million in orders during the third quarter, a pace equal to $1 billion in sales on annualized basis. In prior quarters, orders for the CRS-1, introduced just one year ago, have grown at a slower $400 million annualized rate.

"You're starting to see significant expansion in video capabilities by traditional service providers," said Jonathan Chadwick, Cisco's controller and vice president, in an interview with MarketWatch.

The Scientific-Atlanta deal represented the first billion-dollar acquisition for Cisco in years. The company has been using its huge cash stockpile -- $22.3 billion at the end of the third quarter -- to acquire companies that cater to consumers and smaller businesses.

Earlier this quarter, Cisco announced it would purchase WebEx Communications Inc.
WEBX
for $3.2 billion, expanding its line of products that allow workers to collaborate using Internet-based video.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.